Hong Kong, China WT/TPR/S/241/Rev.1 Page 55

IV. TRADE POLICIES BY SECTOR

(1) OVERVIEW

1. Hong Kong, China's small agricultural sector has continued to decline, mainly reflecting the effect of government measures to buy-out livestock producers for health and environmental reasons. Rice imports and exports remain subject to licensing requirements, and a compulsory reserve-stock scheme remains in place. A new fisheries regulatory framework is under consideration. In the electricity sector, the HKSAR Government has concluded new long-term Scheme of Control agreements with two local (territorial) monopolies, and has thereby deferred liberalization of the electricity market at least until 2018.

2. Hong Kong, China's structural transformation towards an increasingly services-oriented economy has continued since its last TPR. The services sectors' contribution to GDP increased marginally, to about 92% in 2007-08, while the manufacturing sector's declined to 2.5% in 2008. Hong Kong, China remains a major importer and exporter of services (with net-exports amounting to about 20% of GDP), which underscores the importance of free and open trade for the economy.

3. Financial services remain the most important pillar of the economy, with a contribution to GDP of about 16% in 2008. The banking industry has overcome the turmoil in the international financial markets without the need for government bailouts, reflecting prudent regulation and supervision and a cautious approach to lending by Hong Kong, China's banks. Faced with competition from financial centres, such as Shanghai, the HKSAR Government has been promoting the development of offshore renmimbi business in Hong Kong, China. In line with international practice, the HKSAR Government has proposed the establishment of an independent regulator for the insurance industry.

4. Hong Kong, China's highly contested telecoms market has been further deregulated. Regulation of fixed-to-mobile interconnection charges (FMIC), based on the Mobile Party's Network Pays (MPNP) approach, was terminated, as it was considered to restrain innovation in an environment of fixed-mobile convergence. A new Unified Carrier Licence (UCL) was introduced for the licensing of facility-based operators providing fixed or mobile services.

5. In the transport sector, a number of infrastructure projects are under way, aimed at strengthening the competitiveness of Hong Kong, China's airport and seaport and to exploit new market opportunities. The cargo handling capacity of the airport, the largest in the world in terms of cargo throughput, is to be expanded significantly by 2013. Hong Kong, China has also invested in its transport links to Mainland China to expand the port's and airport's catchment areas, particularly in the Pearl River Delta region. Statutory port fees and charges, and licensing fees for vessels and seafarers were reduced in 2009, to prevent cargo diversion towards competing ports. The HKSAR has also concluded a number of new or more liberal agreements with aviation partners to open new business opportunities for Hong Kong, China's airlines. A new cruise ship terminal is aimed at developing Hong Kong, China's position as a regional cruise hub, while the tourism industry has benefited greatly from facilitated visitor arrangements from China.

6. A major new development is the HKSAR Government's decision in the wake of the global financial crisis to promote six industries (testing and certification; medical services; innovation and technology; cultural and creative industries; environmental services; and education services), where it believes Hong Kong, China enjoys "competitive advantages". WT/TPR/S/241/Rev.1 Trade Policy Review Page 56

(2) AGRICULTURE AND FISHERIES

(i) Overview

7. The HKSAR's agriculture and fisheries sector is very small, representing a mere 0.1% of GDP and 0.57% of employment. Virtually all food is imported. Agriculture is dominated by intensive vegetable and livestock farms, which have replaced traditional rice farming over the past decades, and produce mainly for the local market. The most common crops are cut flowers and fresh vegetables (which accounted for about 2.4% of local vegetable consumption in 2009).1

8. The development of the agriculture sector is constrained by a limited supply of farm land and labour, coupled with challenges from import competition, the high cost of maintaining environmental standards, and public calls for improved farm hygiene and safe produce.

9. Since the last TPR of Hong Kong, China, the Government has introduced voluntary surrender schemes to encourage pig and poultry farmers to cease livestock production permanently in the interest of public health and environmental protection (Table IV.1). Both incentive schemes, which involved substantial government outlays, have had a significant impact on restructuring the livestock industry towards fewer but bigger farms. Self-sufficiency declined from 23% in 2006 to 6.2 % in 2009 for live pigs; and from 55% to 53.7 % for live poultry.2 Conversion to other agricultural activities by the farmers concerned is permitted.

10. The one-year Surrender Scheme for pig farmers was launched on 1 June 2006 to encourage pig farmers to cease farm operations in return for one-off (ex-gratia) payments and loans. Application was closed on 31 May 2007 and all pig farmers granted payments had vacated the farms.

11. As a result of the detection of the H5N1 avian influenza virus in environmental swabs taken from local retail markets in June 2008, overnight stocking of live poultry at retail outlets was prohibited with effect from 2 July 2008. It appears that many retailers wanted the Government to buy out their business as they envisaged great difficulties in operating under the constraint of no overnight stocking. The Buyout Scheme for the live poultry trade offered one-off payments to farmers, wholesalers, transporters, and retailers who chose to cease their business permanently, and workers were provided with one-off grants. The application deadline ended on 24 September 2008.

12. Since the last TPR of Hong Kong, China, the value of agricultural production has declined by more than half (from HK$1.2 billion in 2006 to HK$558 million in 2009), largely reflecting the impact of the incentive schemes to abandon livestock production.3 These schemes aside, government intervention to support agriculture has been minimalist: it has provided the basic infrastructure and technical support necessary for the development of modern, efficient, and environmentally safe farming methods. These measures have been notified as "general services" under the Green Box.4 The Government has also made available concessional loans and emergency relief to farmers (Table AIV.1). Hong Kong, China does not provide export subsidies to agriculture or fisheries (Chapter III(3)(v)).

1 AFCD online information. Viewed at: http://www.afcd.gov.hk/english/agriculture/agr_hk/ agr_hk.html. 2 AFCD online information. Viewed at: http://www.afcd.gov.hk/english/agriculture/agr_hk/ agr_hk.html. 3 AFCD online information. Viewed at: http://www.afcd.gov.hk/english/agriculture/agr_hk/ agr_hk.html. 4 WTO documents G/AG/N/HKG/22, 11 June 2007; G/AG/N/HKG/24, 6 June 2008; and G/AG/N/HKG/26, 6 May 2009. Hong Kong, China WT/TPR/S/241/Rev.1 Page 57

Table IV.1 Voluntary surrender schemes in livestock production, 2010 Assistance Expenditures (HK$ million)

Voluntary Surrender Scheme for pig farmers (2006-07) EGPs (ex-gratia payments) to farmers 783.3 One-off grants to workers 3.8 Total 787.1 Effects: Reduction of number of farms 222 out of 265 licensed pig farms ceased business Reduction of production capacity licensed rearing capacity decreased from 426,000 to 75,000 head (down 82%) Voluntary Buyout Scheme for the live poultry trade (2008-09) EGPs for farmers 69.2 EGPs for wholesalers 98.3 EGPs for transporters 21.5 EGPs for retailers 380.2 One-off grants to workers 37.8 Total 607.0 Effects: Reduction of number of operators 48 of the original 71 wholesalers have ceased business under the scheme; 124 of the 250 transporters; and 328 of the 461 retailers have ceased business. A total of 1,083 workers from farms, wholesalers, transporters, and retailers left the industries Reduction of production capacity total licensed rearing capacity at farms has decreased from 1,710,928 to 1,300,500 (down by about 24%)

Source: Information provided by the authorities of Hong Kong, China.

(ii) Rice

13. With the liberalization of the Rice Control Scheme in 2003, the HKSAR Government no longer maintains quantitative restrictions on rice imports. However, imports and exports remain subject to licensing requirements, and there is a compulsory reserve-stock requirement for rice imports for local consumption. Any business may register as a stockholder to import rice for the Hong Kong, China market. While import transactions are based on commercial considerations, stockholders are required to make undertakings regarding import volumes on a quarterly basis, and are required to import those quantities within the period concerned (import undertaking arrangement).

14. Under the Reserved Commodities Ordinance (Cap 296), the Government continues to maintain a reserve-stock requirement of about 13,500 tonnes, adequate for about 15 days' consumption, with the objective of ensuring a stable supply of rice and mitigating public concerns in case of unexpected shortages. The reserve stocks are shared among all registered importers proportionate to their import volumes. Violations of the law are liable to penalties of HK$100,000 and imprisonment of two years. Under the subsidiary legislation, the HKSAR Government has the authority in case of an emergency or a short-term shortage of supply, inter alia, to direct stockholders to release reserve stocks to the market or import more rice (on top of the import undertakings), and to fix maximum wholesale prices.

15. The last authorization for the release of reserve stocks was in June 1989. According to the authorities, the local population still has a psychological attachment to rice as a staple diet and a brief WT/TPR/S/241/Rev.1 Trade Policy Review Page 58

"rice rush" in 2008 illustrated the importance of stable supplies and reserve stocks to reassure the public.

16. Imports of rice from China are subject to registration requirements under an administrative arrangement between the governments of China and the HKSAR. To facilitate implementation of China's export quotas, in place since early 2008 on certain cereals and grain flour (rice, rice flour, and wheat flour), Hong Kong, China has implemented a voluntary registration arrangement for local importers. Importers registered under the arrangement may import cereals and grain flour from authorized exporters in China. The objective of this measure is to ensure that rice imported from China is not re-exported from Hong Kong, China.

17. Total domestic rice consumption is in the range of 300,000-330,000 tonnes per year. Thailand is the main origin of imports, accounting for about 86% of total rice imports by value in 2008, followed by China (10%). The mark-up on the c.i.f. import price of Thai fragrant rice has declined since the market was liberalized in 2003, suggesting that the liberalization measures enhanced competition in the rice trade to the benefit of consumers (Chart IV.1). The number of registered importers/stockholders increased from 52 in 2002 (before liberalization) to 121 in 2009.

Chart IV.1 Mark-up on Thai fragrant rice, January 2006 - December 2009

HK$/kg. Per cent 12.0 90 Mark-up 11.0 (right-hand scale) 80 10.0 70 9.0

8.0 60

7.0 50 6.0 Supermarket selling price (left-hand scale) 40 5.0

4.0 30

3.0 C.i.f. import price 20 2.0 (left-hand scale) 10 1.0

0.0 0 Jul-06 Jul-07 Jul-08 Jul-09 Sep-06 Sep-07 Sep-08 Sep-09 Jan-06 Jan-07 Jan-08 Jan-09 Nov-06 Nov-07 Nov-08 Nov-09 Mar-06 Mar-07 Mar-08 Mar-09 May-06 May-07 May-08 May-09

Source : Information provided by the authorities of Hong Kong, China.

(iii) Fisheries

18. Hong Kong, China depends mainly on imports to satisfy local demand for seafood. Its fishing industry produced an estimated 159,000 tonnes of produce, valued at about HK$2 billion, in 2009.5

5 AFCD online information. Viewed at: http://www.afcd.gov.hk/english/fisheries/fish_cap/ fish_cap_latest/fish_cap_latest.html. Hong Kong, China WT/TPR/S/241/Rev.1 Page 59

About of 78% of the catch was harvested in waters outside the HKSAR. The local fishing fleet consists of some 3,700 fishing vessels and 7,600 fishermen.

19. Government intervention to protect fisheries has been minimal: it has provided the basic infrastructure and technical support for the sustainable development of fisheries, and has made available concessional loans and emergency relief to fishermen (Table AIV.1). Most loans were granted under the Fish Marketing Organization Loan Fund, of which HK$76.5 million in 2008-09 were provided to fishermen affected by the two-month annual fishing moratorium in the South China Sea imposed by Mainland China.6

20. To alleviate the pressure on fisheries resources and promote the sustainable development of the fisheries industry, the Government has implemented a variety of fisheries management and conservation measures, including enforcement against destructive fishing practices and illegal entry of non-local fishing vessels into Hong Kong, China waters, deployment of artificial reefs, designation of marine parks, and assisting fishermen to switch to sustainable fisheries operations through training, technical advice, and credit facilities.

21. In 2006, the Government established the Committee on Sustainable Fisheries to study and recommend options for achieving the sustainable development of the marine ecosystem and the fisheries industry. The major recommendations made by the Committee include the introduction of a mechanism to limit new entrants into the fishing industry, banning trawling in HKSAR waters, designating fisheries protection areas to protect important fisheries nursery and spawning grounds, and prohibiting commercial fishing in marine parks. The HKSAR Government is in the process of considering the Committee's recommendations.

(3) ENERGY

(i) Overview

22. Hong Kong, China has no indigenous energy resources. All coal and natural gas for electricity generation in the HKSAR is imported from China and other countries. China also supplies natural gas for the production of town gas in the HKSAR. The agreement with China on the supply of nuclear power was renewed in August 2008 until 2034.

23. The HKSAR Government's energy policy objectives are: to ensure that the energy needs of the community are met safely, efficiently, and at reasonable prices; to use and promote the efficient use and conservation of energy; and to minimize the environmental impact of energy production. The local electricity plants are primarily coal-fired, contributing to the smog and carbon dioxide emissions that plague the Pearl River Delta region. Since 1997, the two electricity companies in the HKSAR are no longer permitted to build new coal-fired electricity plants; new generation units are required to use natural gas as fuel. The Government has set a target of having 1-2% of HKSAR's electricity needs met by renewable energies in 2012. Electricity, gas, and water have contributed about 2-3% to GDP in recent years (Table I.2).

24. All refined oil products are imported. There have been allegations of anti-competitive conduct in the auto-fuel market but a study initiated by the Competition Policy Advisory Group in 2006 found no clear evidence of collusion by oil companies in the Hong Kong, China auto-fuel retail market.7 The Government has been monitoring whether changes in local retail prices are in line with the trend movements of international oil prices. It has also taken steps to enhance competition by

6 See also WTO document G/SCM/N/186/HKG, 5 October 2009. 7 Competition Policy Review Committee (2006). WT/TPR/S/241/Rev.1 Trade Policy Review Page 60

removing entry barriers for operators of petrol filling stations, which are tendered by the Government. Strategic reserves of gas oil and naphtha are maintained by the oil and gas companies based on a voluntary arrangement with the HKSAR Government, while the local electricity companies maintain their own fuel reserves for electricity generation.

(ii) Electricity

25. Electricity is supplied by two territorial de facto monopolies. CLP Power Hong Kong Ltd (CLP Power) supplies electricity to Kowloon and the New Territories, including Lantau and several other outlying islands (representing about 80% of the territory's population), while the Hongkong Electric Company Ltd (HEC) supplies electricity to Hong Kong Island and the neighbouring islands of Ap Lei Chau and Lamma. CLP Power and HEC are private-sector-owned companies that have their own generation, transmission, and distribution systems. CLP Power's transmission system is connected to the electricity grid in Guangdong Province of China, for import and export to the province.8 About 20% of electricity consumption in Hong Kong, China is imported from nuclear plants in Guangdong Province.

26. Since 1964, the electricity companies have been regulated through mutually agreed scheme of control agreements (SCAs), which involve, inter alia, the regulation of tariffs and permitted nominal rates of return. The SCAs also require the companies to seek the Government's approval for their corporate development plans relating to the provision and future expansion of their electricity supply system. The financial matters of the power companies are monitored by the Environment Bureau.

27. The current agreements for CLP Power and HEC took effect on 1 October 2008 and 1 January 2009, respectively.9 These SCAs seek to address some of the criticisms made against previous agreements, notably that the permitted rates of return (13.5-15%) are high; returns based on fixed assets encourage over-investment; fixing the permitted rate of return over a 15-year period (1993-2008) is inflexible; and annual tariff and auditing reviews lack transparency.10

28. The term of the new SCAs has been shortened to ten years, ending in 2018, with an option for the Government to extend it for five years, after review of the prevailing market conditions. The Government may open the electricity market to competition after the expiry of the current SCAs. It is currently undertaking preparatory work with a view to the possible replacement of the SCAs by a new regulatory framework for electricity supply.

29. Under the current SCAs, the permitted rate of return on the average net fixed assets (ANFAs) of the power companies has been reduced to 9.99%, bringing a material reduction in basic tariffs. Fixed assets for renewable energies will attract a higher permitted rate of return at 11%. To guard against over-investment, half of the net asset value of machinery and electrical equipment of a new generating facility whose capacity is found to be excessive, upon commissioning, to meet the latest electricity demand, is excluded from the company's ANFA for calculating the return. The penalty does not apply to renewable energy assets, and is removed when demand catches up with generation capacity. There are also financial incentives and disincentives in respect of emissions performance, supply reliability, operational efficiency, customer services, energy efficiency and renewable energy.

8 CLP Power imports about 70% of the power generated at units 1 and 2 of the Guangdong Nuclear Power Station at Daya Bay in China. CLP Power also has the right to use up to 50% of the 1,200MW capacity of the Guangzhou Pumped Storage Power Station (Phase I) at Conghua in China. 9 Legislative Council (2008). 10 Legislative Council (2005). Hong Kong, China WT/TPR/S/241/Rev.1 Page 61

30. The electricity tariffs charged by the power companies cover operating costs and fuel charges and include the permitted return for providing the service. Their basic tariffs, which include a "standard fuel cost" as agreed between the Government and the two power companies, require approval from the Government. Differences between the standard fuel cost and actual fuel prices are captured in a Fuel Clause Account, with surpluses being returned to consumers or deficits being recovered from consumers by means of a rebate or a surcharge (Fuel Clause Charge). A Tariff Stabilisation Fund accumulates funds to mitigate the impact of tariff increases for consumers. In order to avoid over-accumulation of funds, the Fund is capped at 8% of annual local sales, equivalent to about one-month's local sales revenue.11

31. Hong Kong's residential electricity tariffs, according to information provided by CLP Power and HEC, are lower than those in other major cities, including Singapore, Sydney, and Tokyo; more favourable tariffs are offered in Seoul, Shanghai, Chinese Taipei, and Vancouver.12 CLP Power and HEC maintain different tariff structures.13 CLP's average net tariff (basic tariff plus fuel clause charge) was increased by 2.6%, to HK$0.915 per kWh, effective January 2010. The increase was justified with new capital investment to ensure supply reliability and minimize the environmental impact of electricity generation, and higher operating costs. HEC's average net 2010 tariff remains unchanged, at HK$1.199 per kWh. According to the authorities, Hong Kong, China's commercial electricity tariffs are lower than those in other major cities, including Sydney and San Francisco.

32. In 2008, the Government introduced electricity subsidies to help ease inflationary pressures faced by households. Each domestic-tariff electricity account was credited with a monthly subsidy of HK$300 from September 2008 to August 2009. The total cost of the subsidy amounted to about HK$8.8 billion.

(4) MANUFACTURING

33. In the late 1980s, HKSAR manufacturers began relocating and expanding lower-value-added, assembly-type manufacturing operations to areas with lower labour costs, notably China. Over time, the region of the Pearl River Delta evolved into Hong Kong, China's industrial hinterland. At end 2008, Guangdong province accounted for about 30.4% of Hong Kong, China's stock of outward FDI in China, or 14.5% of Hong Kong, China's total stock of outward FDI.14 As a result of manufacturing investments and arrangements in the Mainland and elsewhere, the productive capacity of the Hong Kong, China economy has effectively been expanded. This process was accompanied by HKSAR parent companies retaining strategic control over an increasingly globalized production network, and assuming the role of services provider to their foreign interests. Many of these services are complementary to manufacturing, and include product design and brand development, sourcing of materials, marketing of products, transport and communications, banking and finance, and other professional services.

34. As a consequence of Hong Kong, China's economic transformation, within two decades the manufacturing sector's contribution to GDP declined from about 20% (in 1988) to 2.5% in 2008 (Table I.2). While the Closer Economic Partnership Arrangement with China is unlikely to stop the declining trend of Hong Kong, China's manufacturing sector, it has nonetheless had a positive impact

11 The Tariff Stabilisation Fund replaced the Development Fund under the previous SCAs, which was operated in the same manner with a higher accumulation cap (12.5%). 12 Legislative Council (2009). 13 HEC online information. Viewed at: http://www.heh.com/hehWeb/DomesticServices/Billing PaymentAndElectricityTariff/TariffTable/Index_en.htm. 14 Federation of Hong Kong Industries (2007). WT/TPR/S/241/Rev.1 Trade Policy Review Page 62

on some local manufacturing activities in terms of additional investment and employment, in particular in the pharmaceutical industry.15

35. The local manufacturing industry is geared to production with higher value-added content. It employed 162,500 people in 2008 (4.6% of overall employment), implying that labour productivity in 2008 was roughly only half the level in the rest of the economy. The paper products and printing industry is the largest employer in the sector and contributed about 33% to manufacturing GDP in 2008, followed by textiles and wearing apparels with 11%. Other major industries include electrical and electronic products, machinery, professional equipment and optical goods.

36. The textiles and clothing industry has continued to contract in terms of employment and output, with 2,036 enterprises remaining in the HKSAR as of March 2010. Even so, textiles and clothing products remain one of the major export products of Hong Kong, China, accounting for 11.6% of domestic merchandise exports and 10.3% of re-exports (in value terms) in 2009 (Chart I.1). Lower-value production has been relocated, mainly into China, while local enterprises have moved up the value chain towards original brand manufacturing (OBM) production.16 The authorities expect that brand-name products and products with high value-added content will remain competitive on the world market. They also see potential for Hong Kong, China developing into a logistics and sourcing hub for textiles and clothing. Some of Hong Kong, China's textiles products are currently subject to anti-dumping measures imposed by India and Mexico (Chapter III(2)(vi)).

37. The HKSAR Government has been supporting the development of small and medium-size enterprises (SMEs), which account for over 60% of the employment in the manufacturing sector. A number of funding schemes have been introduced to help enterprises expand markets and enhance competitiveness, and to ease liquidity problems in the aftermath of the global financial crisis (Chapter III(4)(ii)).

(5) SERVICES

(i) Main features

38. The structural transformation of the HKSAR towards an increasingly services-oriented economy continued during the review period. The contribution of services to GDP rose to 92% in 2008, compared with 73% two decades earlier (Table I.2). The growth of Hong Kong, China's services sector has been driven primarily by the fast growth and liberalization of the Mainland economy. Since 2004, the services sector has benefited from incremental, preferential services liberalization under CEPA, which allows Hong Kong, China-based services providers to capitalize on the market potential arising from China's shift of development priorities from manufacturing towards services (currently accounting for about 40 % of GDP).

39. The HKSAR is a net-services exporter, with imports (payments) of non-factor services equivalent to about half of exports of services in 2009 (Table IV.2 and Charts IV.2 and IV.3). Net-exports contributed about 20% to GDP in 2009 (18.8% in 2006). The services subsectors with the highest growth rates in recent years are financing and insurance, followed by import and export trade, and transport and storage services, reflecting Hong Kong, China's position as a financial and trading centre.

15 Legislative Council Panel on Commerce and Industry (2007). 16 Manufacturers engage in OBM to develop and produce products under their own brand name, involving higher value-added activities such as design, brand building, and brand marketing. OBM requires a greater range of expertise since companies are involved in the entire process, from initial design, to production, sales, and marketing. Hong Kong, China WT/TPR/S/241/Rev.1 Page 63

Table IV.2 Trade in services, 2005-09 (US$ million and %) 2005 2006 2007 2008 2009

Exports (US$ million) 63,700 72,741 84,698 92,109 86,302 (% of total) Transportation 31.9 30.8 30.2 31.4 29.0 By sea 16.3 16.0 16.6 17.2 .. By air 11.3 10.9 10.3 10.6 .. By other transport 4.2 3.9 3.2 3.5 .. Travel 16.2 16.0 16.2 16.6 19.1 Insurance 0.6 0.6 0.6 0.6 0.6 Financial 9.8 12.7 14.7 12.8 12.6 Merchanting and other trade-related 32.7 31.5 30.1 30.1 30.2 Other 8.7 8.3 8.2 8.5 8.5

Imports (US$ million) 33,977 37,062 42,589 47,064 44,377 (% of total) Transportation 30.8 31.3 32.7 33.6 30.8 By sea 15.2 15.6 17.8 16.8 .. By air 13.9 14.1 13.4 15.6 .. By other transport 1.7 1.6 1.5 1.2 .. Travel 39.2 37.9 35.3 34.2 36.0 Insurance 1.8 1.7 1.7 1.5 1.5 Financial 4.1 5.4 6.6 6.7 7.7 Merchanting and other trade-related 7.0 7.3 7.3 7.3 7.2 Other 17.1 16.4 16.4 16.6 16.8

.. Not available. Source: Census and Statistics Department online information. Viewed at: http://www.censtatd.gov.hk; and information provided by the authorities.

40. The HKSAR has made specific commitments under the GATS that cover financial services; business services; communication services (including telecommunications); construction and related engineering services; distribution services; tourism and travel-related services; recreational, cultural and sporting services; and maritime transport services.17 The Hong Kong, China schedule contains no MFN exemptions. (ii) Financial services (a) Banking and finance 41. Hong Kong, China was the world's 12th largest banking centre in 2009 in terms of assets.18 The city has one of the highest concentrations of banks in the world, with 70 of the largest 100 banks having a commercial presence (Table IV.3). The banking sector's contribution to GDP was 10.2% and its share in total employment was 2.7% in 2008, which implies labour productivity at almost four times higher than in the rest of the economy. The banking sector is highly outward-oriented, with China being the major export market for banking services.19 Exports of investment banking services amounted to HK$965 million in 2008, up from HK$531 million in 2006.

17 WTO documents GATS/SC/39, 15 April 1994; GATS/SC/39/Suppl.2, 11 April 1997; GATS/SC/39/Suppl.3, 26 February 1998; and S/L/30, 12 September 1996. 18 HKMA (2010). 19 HKTDC online information. Viewed at: http://www.hktdc.com/info/mi/a/hkip/en/1X003ULX/1/ Hong-Kong-Industry-Profiles/Banking.htm. WT/TPR/S/241/Rev.1 Trade Policy Review Page 64

Chart IV.2 Trade in services by major subsectors, 2009

Exports Imports

Transportation Transportation Other 29.0% 30.8% 9.1% Other 18.3%

Travel Merchanting & 19.1% trade-related 7.2% Travel Merchanting & Finance 36.0% trade-related Finance 7.7% 30.2% 12.6%

Total: HK$ 669.0 billion Total: HK$ 344.0 billion

Source : Census and Statistics Department online information. Viewed at: http://www.censtatd.gov.hk [14 May 2010].

42. The Government attaches great importance to the development of offshore renmimbi (RMB) business in the HKSAR, as a step towards better integration of its financial system with China. The city has positioned itself as a testing ground for China's measures relating to the liberalization of its capital account and the international use of the RMB.20 Use of the RMB in Hong Kong, China has expanded steadily since RMB business for individuals was first allowed in 2004 (deposits, remittances, etc.).21 Since June 2007, Mainland financial institutions (and their branches in the HKSAR), after obtaining regulatory approval, have been permitted to issue RMB bonds in the HKSAR. Eligibility for bond issuers was broadened to include Mainland subsidiaries of Hong Kong banks in 2009, when the Government of China also issued RMB sovereign bonds in Hong Kong, China. The amount of RMB bonds issued in Hong Kong, China reached RMB 16 billion in 2009, with cumulative RMB bond issuance amounting to some RMB 40 billion by July 2010.

43. China's RMB trade-settlement pilot scheme was introduced in 2009 and expanded in 2010; it now covers trade and current account transactions between 20 cities and provinces in China and the rest of the world. The wider use of the RMB outside Mainland China for trade settlement is expected to increase RMB liquidity available outside China and, given its established RMB financial infrastructure, Hong Kong, China is well-positioned to benefit from the greater scope of RMB financial intermediation activities.

20 Financial Secretary (2010). 21 WTO (2002). Hong Kong, China WT/TPR/S/241/Rev.1 Page 65

Chart IV.3 Trade in services by destination and origin, 2008

Exports Imports

United States United States China 14.8% China 21.4% 25.6% 25.0% United Kingdom 7.2%

United Kingdom 7.6% Japan 8.4%

Japan 6.5% Singapore 5.8% Chinese Taipei Other Other 5.2% 38.1% 34.4%

Total: HK$ 703.4 billion Total: HK$ 364.2 billion

Source : Census and Statistics Department online information. Viewed at: http://www.censtatd.gov.hk [10 May 2010].

Table IV.3 Structure and performance ratios of the banking sector, 2005-09 (a) Structure 2005 2006 2007 2008 2009

Number of authorized institutions 285 286 279 271 270 Licensed banks 133 138 142 145 145 Incorporated in the HKSAR 24 24 23 23 23 Incorporated outside the HKSAR 109 114 119 122 122 Restricted licence banks 33 31 29 27 26 Incorporated in the HKSAR 20 18 16 15 14 Incorporated outside the HKSAR 13 13 13 12 12 Deposit-taking companies 33 33 29 28 28 Incorporated in the HKSAR 33 33 29 28 28 Incorporated outside the HKSAR 0 0 0 0 0 Number of local representative offices 86 84 79 71 71

Note: As at end period. (b) Performance ratios (%) a All authorized institutions Retail banks 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009

Asset quality Bad debt charge to total assets 0.01 0.03 0.04 0.18 0.13 -0.01 0.01 0.04 0.18 0.10 b Non-performing loans 1.34 1.05 0.75 1.23 1.58 1.37 1.11 0.85 1.24 1.35 a Retail banks include all local banks plus some foreign retail banks. b Refers to total gross classified: "substantial", "doubtful", and "loss". Source: Hong Kong Monetary Authorities online information. Viewed at: http://www.info.gov.hk/hkma/eng/public/ar09/ pdf/ar2009.pdf [20 May 2010]. WT/TPR/S/241/Rev.1 Trade Policy Review Page 66

44. The Closer Economic Partnership Arrangement with China has offered substantial improvements in market-access conditions in the Mainland for the HKSAR banking sector. The minimum total asset requirement for Hong Kong banks to set up branches or corporate enterprises on the Mainland is US$6 billion, compared with US$20 billion with non-CEPA foreign banks. As from January 2009 (CEPA Supplement V), Mainland-incorporated banking institutions established by a Hong Kong, China bank may apply to locate their data centres in Hong Kong, China. As from October 2009, branches of HKSAR banks in any municipality in Guangdong Province may apply to establish sub-branches in other municipalities within the province (CEPA Supplement VI).22 The HKSAR Government has issued ten certificates of Hong Kong Service Supplier to Hong Kong-based banking and financial services providers (excluding insurance and securities).

45. The Hong Kong Monetary Authority (HKMA) is responsible for regulation and prudential supervision of the banking sector under the Banking Ordinance. Its licensing regime has remained unchanged since the last TPR of Hong Kong, China. Institutions that wish to carry on banking business or the business of taking deposits in Hong Kong, China must be authorized by the HKMA under the Banking Ordinance. Hong Kong, China maintains a three-tier structure: licensed banks, restricted licence banks (RLBs), and deposit-taking companies (DTCs). These are collectively called "authorized institutions" (AIs). Only licensed banks are allowed to carry on banking business, i.e. provide current and savings accounts and demand deposits, without restriction on size or maturity, and pay or collect cheques. RLBs are restricted to taking call, notice or time deposits from the public in amounts of HK$500,000 and above. DTCs are restricted to taking deposits of HK$100,000 and above and with a maturity of at least three months. In addition to AIs, subject to approval of the HKMA, overseas banks may maintain local representative offices, which are confined to representational and liaison activities and are not allowed to conduct banking business or take deposits. AIs may engage in securities business if they have obtained registration from the Securities and Futures Commission. They may also engage in insurance business (bancassurance) if authorized by the Office of the Commissioner of Insurance. A foreign bank may enter HKSAR's market by establishing a branch and operate under a banking licence or restricted banking licence. Furthermore, it may acquire a locally incorporated authorized institution, or establish a local representative office.

46. According to the IMF, the banking sector in Hong Kong, China has weathered the turmoil in the international financial markets, reflecting prudent regulation and supervision by the HKMA and a cautious approach to lending by Hong Kong banks.23 It notes that the banks were generally not exposed to securitized products that were at the core of the global financial crisis following the collapse of Lehman Brothers. Overall, the banking sector is healthy, highly liquid, and well-capitalized (Table IV.3). There was no need in 2008 for the HKSAR Government to provide any financial support (bail-out) to financial institutions as a result of the global financial crisis.24 Nonetheless, the HKMA implemented a series of measures to help maintain the stability and confidence in the monetary and banking sectors.

47. Under the deposit insurance scheme in force since September 2006 (Deposit Protection Scheme (DPS)) eligible deposits held with licensed banks were protected up to a limit of HK$100,000 per depositor per bank. In October 2008, the Financial Secretary announced, as a pre-emptive measure, provision of a full guarantee for deposits held with all authorized institutions in Hong Kong,

22 Under the latest CEPA Supplement VII, effective 1 January 2011, a Hong Kong bank must have maintained a representative office in the Mainland for one year prior to its application to set up a subsidiary or a branch, lowered from two years (two years for non-CEPA foreign banks); and time a Hong Kong bank's operating institution in the Mainland must have been profitable for one year prior to an application to conduct RMB business, lowered from two years (two years for non-CEPA foreign banks). 23 IMF (2009). 24 WTO document WT/TPR/OV/12, 18 November 2009. Hong Kong, China WT/TPR/S/241/Rev.1 Page 67

China (in force until end 2010). To facilitate a smooth exit from the full deposit guarantee, legislative amendments have been made to enhance the DPS, including the raising of the DPS protection limit from HK$100,000 to HK$500,000. The enhancements will take effect at the beginning of 2011.

48. Furthermore, a Contingent Bank Capital Facility was established as a temporary measure until the end of 2010 to provide locally incorporated licensed banks with access to additional capital. The HKMA also adopted a flexible approach towards the buffer above the statutory minimum capital adequacy ratio of 8% imposed on individual locally incorporated authorized institutions (AIs), to ease the constraints on their capital for continuing to provide credit. AIs have remained well capitalized without the need for the HKMA to lower their minimum capital requirements. The HKMA is in the process of implementing measures to strengthen the Basel II capital framework issued by the Basel Committee on Banking Supervision in July 2009.25 Implementation of enhancements on capital and disclosure requirements (i.e. Pillars 1 and 3) will be effected through the legislative process, which is currently under way, and those on the supervisory review process (SPR) to strengthen AIs' risk and capital management practices (i.e. Pillar 2) took effect in June 2010.

49. In October 2008, HKMA issued a circular urging banks to be more accommodating in lending to SMEs within the bounds of prudent credit assessment. In November 2008, it issued a further circular, "Hong Kong Approach to Corporate Difficulties", to remind banks that when dealing with corporate borrowers in financial difficulties, they should remain supportive and not hastily put companies into receivership or issue writs demanding repayment if they have a reasonable chance of survival. There are no government-owned banks and there is no directed lending in the HKSAR.

50. Lending by Hong Kong banks is skewed towards the local property market. Loans for building, construction, and property development, and investment and purchase of private residential properties accounted for about 40% of total customer loans in Hong Kong, China at the end of 2009. The Government is vigilant about an excessive expansion in mortgage lending, so as to avert the threat of asset-price bubbles, which could destabilize the economy.26 In October 2009, the HKMA issued guidelines to banks for tightening their credit underwriting standards (i.e. by lowering the loan-to-value ratio for mortgages on properties valued at HK$20 million or above, and reminding banks to process mortgage loan applications prudently).

(b) Insurance

51. Hong Kong, China's insurance industry has gone through a crisis of confidence triggered by the financial difficulties of the American International Group, Inc. (AIG) in 2008. AIG has two composite insurance subsidiaries and four wholly owned general insurance subsidiaries in Hong Kong, China.27 In response to the AIG crisis, the Office of the Commissioner of Insurance (OCI) exercised its statutory power to safeguard the interests of policyholders by requiring insurance subsidiaries of AIG operating in Hong Kong, China to seek his prior approval on all transactions involving movement of assets or funds to related entities within the same group. In addition, the OCI stepped up monitoring of the financial and solvency position of all other authorized insurers in Hong Kong, China.

25 BIS online information. Viewed at: http://www.bis.org/press/p091217.htm. 26 HKMA (2010). 27 The six subsidiaries include: (i) American International Assurance Company (Bermuda) Limited, (ii) American International Assurance Company Limited, (iii) American Home Assurance Company, (iv) National Union Fire Insurance Company of Pittsburgh, Pa., (v) New Hampshire Insurance Company, and (vi) AIG United Guaranty Insurance (Asia) Limited. WT/TPR/S/241/Rev.1 Trade Policy Review Page 68

52. To bolster public confidence in the insurance industry and promote the general stability of the insurance market, the HKSAR Government has been working with the insurance industry to establish a policyholders' protection fund (PPF) in the event of insolvency of an insurer. The Government has commissioned a consultancy study to examine the scope of coverage, levy rates, target fund size, and other detailed arrangements for the proposed PPF, with a view to consulting the Legislative Council before the end of 2010. The regulatory arrangements for selling Investment-Linked Assurance Schemes (ILAS) products have also been improved to ensure that policyholders are aware of the risks and that products are appropriately aligned with the risk profile of individual investors.

53. Hong Kong, China's insurance market is open to foreign insurers, whether incorporated locally or outside Hong Kong, China. Commercial presence in Hong Kong must be in the form of a subsidiary, branch or representative office, although insurance business (i.e. writing an insurance contract or soliciting insurance business) may not be carried out through a representative office.28 The same rules apply to domestic and foreign insurers.

54. As of March 2010, there were 170 insurers registered in HKSAR, of which 81 were incorporated outside Hong Kong, China. These insurers come from 21 countries, led by Bermuda (14), the United States (13), and the United Kingdom (13).29 Insurance policies are primarily sold by agents but bancassurance is growing in importance. The insurance penetration ratio for long-term business (mainly life insurance) has been increasing, which reflects, inter alia, rising personal wealth and a growing preoccupation with retirement planning among Hong Kong, China's ageing population (Table IV.4). There were 19 reinsurers with commercial presence in Hong Kong, China in June 2010. In 2008, gross premiums generated by the reinsurers totalled HK$1.4 billion for general insurance.

55. The provision of insurance services is governed by the Insurance Companies Ordinance (Cap. 41) and subsidiary legislation.30 The Office of the Commissioner of Insurance (OCI), an arm of the Financial Services and Treasury Bureau, is responsible for the regulation and prudential supervision of insurers, insurance agents, and brokers, and has statutory powers to seize assets and property of an insurer, and control mergers and acquisitions. The terms and conditions of insurance policies and premium rates are market-determined. The licensing regime for insurers and re-insurers remained unchanged during the review period.

56. The Insurance Companies Ordinance provides for a self-regulatory system of insurance intermediaries (insurance agents and brokers).31 Persons cannot act both as insurance agent and broker. Insurance agents must be registered/licensed with the Insurance Agents Registration Board (IARB) of the Hong Kong Federation of Insurers, which also handles complaints against agents, and monitors compliance with the Code of Practice for the Administration of Insurance Agents. Insurance brokers must either be authorized by OCI or be a member of the Hong Kong Confederation of

28 WTO document GATS/SC/39/Suppl.3, 26 February 1998. 29 The leading non-life insurers include HSBC Insurance; American Home Assurance; Bank of China Group Insurance; Ming An Insurance (Hong Kong); QBE Hongkong & Shanghai Insurance; and AXA General Insurance (Hong Kong). The major life insurers include AIA (Bermuda); HSBC Life; Manulife; Prudential UK; Hang Seng Life; and AXA China (Bermuda). See Hong Kong Trade Development Council (HKTDC) online information. Viewed at: http://www.hktdc.com/info/mi/a/hkip/en/1X003UWM/1/Hong- Kong-Industry-Profiles/Insurance.htm. 30 This includes: the Insurance Companies (Determination of Long Term Liabilities) Regulation; the Insurance Companies (Margin of Solvency) Regulation; and the Insurance Companies (General Business) (Valuation) Regulation. 31 An insurance agent generally means a person who advises or arranges insurance contracts on behalf of an insurer; an insurance broker means a person who negotiates or arranges insurance contracts on behalf of the (potential) policy holders. Hong Kong, China WT/TPR/S/241/Rev.1 Page 69

Insurance Brokers or the Professional Insurance Brokers Association. OCI's Insurance Intermediaries Quality Assurance Scheme (Insurance Intermediaries Qualifying Examination, Continuing Professional Development Programme) seeks to ensure a high professional standard and qualification of insurance agents and brokers.

Table IV.4 Insurance data, 2005-09 2005 2006 2007 2008 2009

GDP (at current market prices, HK$ million) 1,382,590 1,475,357 1,615,455 1,675,315 1,632,284 Population (mid-year) 6,813,200 6,857,100 6,925,900 6,977,700 7,003,700 Per capita GDP (at current market prices, HK$) 202,928 215,158 233,248 240,096 233,060

Number of authorized insurers 175 181 178 175 171 Long term 46 47 47 46 46 General 110 116 112 110 106 Composite 19 18 19 19 19 Number of authorized insurance brokers 471 486 508 538 562 Number of registered insurance agents 29,163 29,715 31,042 33,159 34,429

Premium income (HK$ million) a Long-term business (office premiums) 114,756 133,087 173,016 161,946 157,123 a General business (gross premiums) 22,546 22,958 24,271 26,716 28,550

Insurance penetration (premium, % of GDP) Long-term business 8.3 9.0 10.7 9.7 9.6 General business 1.6 1.6 1.5 1.6 1.7 a Figures are provisional. Source: Census and Statistics Department (2010), Statistical Digest of the Services Sector (2010 edition); Office of the Commissioner of Insurance (2009), Annual Report 2008; Office of the Commissioner of Insurance (2009), Annual Statistics for General Business 2008; Office of the Commissioner of Insurance, Annual Statistics for Long Term Business 2008; and Office of the Commissioner of Insurance (2010), Provisional Statistics on Hong Kong Insurance Business 2009 (ILens Newsletter No. 32).

57. The Government commenced a three-month public consultation in July 2010 on the proposed establishment of an independent Insurance Authority (IA). In line with international practices, the proposed independent IA would be financially and operationally independent of the Government, with a range of supervisory powers that would facilitate effective regulation of insurers. The proposed IA would also regulate insurance intermediaries directly through a licensing system.

58. Statutory insurance, which includes third-party liability insurance in respect of motor vehicles and vessels, and employer's liability insurance in respect of employees, must be purchased from an insurer authorized in the HKSAR.32

59. Under the CEPA, HKSAR insurers have preferential access to Mainland China's insurance market, subject to specified access conditions, including a maximum equity share in a Mainland insurance company of 24.9% (compared to 10% under China's GATS commitments). Since January 2008, HKSAR insurance agencies have been permitted to set up wholly owned enterprises on the Mainland to provide insurance agency services. To date, nine HKSS certificates for carrying out insurance business on the Mainland have been issued.

32 WTO document GATS/SC/39/Suppl.3, 26 February 1998. WT/TPR/S/241/Rev.1 Trade Policy Review Page 70

(iii) Telecommunications

60. Hong Kong, China's telecommunications market has been liberalized and there are no foreign ownership restrictions. The regulatory regime is pro-competition and pro-consumer. The situation has generally not changed from that in 2006. The HKSAR Government pursues the objective of establishing Hong Kong, China as the pre-eminent communications hub in the region. The telecommunications sector's contribution to GDP was 1.3% in 2008.

61. As the result of facility-based competition among operators, consumers benefit from a choice between multiple fixed and wireless city-wide broadband networks. As at March 2009, over 85% of households have the choice between at least two networks for fixed wireline services, which may include broadband services, telephony services, and internet protocol television services (IPTV). Tariffs for telecom services are market-determined. The regulator pursues an ex-post regulatory approach with regard to telecom prices33, inter alia, to allow operators greater flexibility in price setting in order to respond to market conditions. The prices of mobile services, as well as fixed services, are among the lowest in the world when measured by affordability.34

62. Telecom services (and broadcasting services) are the only sectors of the economy that are currently subject to sectoral competition rules (see also Box III.1). The competition framework described in the last TPR of Hong Kong, China remains unchanged. Since 2006, the Office of Telecommunications Authority (OFTA) has investigated 17 cases of alleged anti-competitive conduct but no breach of law was found.

63. OFTA received 4,051 consumer complaints against telecommunication operators in 2009. The majority were related to disputes on billing, contracts, and service termination. In general, OFTA investigates a complaint if there is sufficient evidence to establish a prima facie case on possible breach of the relevant provisions under the laws, regulations or licence conditions. Other consumer complaints are referred to the operators concerned for direct settlement with the complainants. The Consumer Council received 9,165 complaints concerning telecommunications services in 2009.35 OFTA is in the process of consulting the public on the implementation of a Consumer Complaint Settlement Scheme, which is aimed at establishing an alternative mechanism for resolving disputes between consumers and operators operated by independent adjudicators or mediators.

64. There are no restrictions on foreign ownership of fixed telecommunications services, no limitations on the number of licences issued, and no requirements regarding network rollout or investment. There are currently six main fixed network operators.36 PCCW is no longer presumed to have a dominant position in the fixed telecommunications market in Hong Kong, China (since 2005).

65. As of June 2010, 5 licensees for satellite-based facilities and 29 licensees for cable-based facilities were authorized to provide external fixed services only (i.e. fixed services to connect to

33 Under the ex post regulatory approach on tariffs, telecommunications licensees are not required to seek prior approval from the regulator, but only to put in place proper mechanisms to inform their customers and notify the regulator in respect of any new tariffs or proposed changes in their service tariffs. However, the regulator is empowered under the Telecommunications Ordinance to intervene in case of any anti-competitive conduct of the licensees. 34 ITU (2009), Tables 6.2 and 6.4. 35 Consumer Council online information. Viewed at: http://www.consumer.org.hk/website/ ws_en/news/press_releases/2010020401.html. 36 They include Hong Kong Broadband Network Limited, Hong Kong Cable Television Limited, Hutchison Global Communications Limited, New World Telecommunications Limited, PCCW-HKT Telephone Limited & Hong Kong Telecommunications (HKT) Limited, and Wharf T&T Limited. Hong Kong, China WT/TPR/S/241/Rev.1 Page 71

places outside Hong Kong, China). Hong Kong, China has adopted an open sky policy in regulating the provision of satellite services.

66. For mobile communications, 5 operators are currently operating 14 networks.37 The mobile services penetration rate in Hong Kong of over 170% is among the highest in the world (Table IV.5).

Table IV.5 Telecommunications services, 2005-09 2005 2006 2007 2008 2009

Population '000 (end year) 6,837.8 6,909.5 6,952.8 6,988.9 7,026.4 Number of domestic households ('000) 2,197.1 2,220.9 2,247.1 2,277.4 2,311.6 Number of residential main telephone lines, at 2,116.2 2,135.0 2,282.0 2,274.0 2,360.0 end year ('000) Penetration rate (as % of domestic households) 96.3 96.1 101.6 99.9 102.1 Public mobile customers, at end year ('000) 8,544.3 9,444.1 10,588.5 11,374.2 12,206.9 Penetration rate (as % of total population) 125.0 136.7 152.3 162.7 173.7 Registered broadband internet access accounts in domestic households, at end year ('000) 1,507.2 1,594.7 1,718.1 1,782.6 1,887.4 Penetration rate for domestic households (%) 68.6 71.8 76.5 78.3 81.7 Telecom service revenue (HK$ million) 51,094.0 52,811.0 56,323.0 60,550.0 .. Telecom investment (HK$ million) 9,346.0 6,047.0 7,098.0 7,397.0 ..

.. Not available. Source: Office of the Telecommunications Authority online information. Viewed at: http://www.ofta.gov.hk; and Census and Statistics Department online information. Viewed at: http://www.censtatd.gov.hk.

67. To promote competition among operators, fixed number portability was introduced in 1997 and mobile number portability in 1999. This allows consumers to switch to another local network operator (fixed or mobile) without having to change telephone numbers. Starting July 2009, operators may implement fixed mobile number portability (FMNP) on a voluntary basis. No operators are currently implementing FMNP.

68. In addition to facility-based operators providing local fixed services, 190 internet service providers are licensed to provide broadband services (as of April 2010). The household broadband penetration rate is in excess of 80%. The density of WiFi broadband internet access services in public places has increased significantly: more than 9,000 public Wi-Fi hotspots have been commercially established by about 30 service providers in the territory. Under the Government WiFi programme, free wireless internet access services are provided at around 380 designated government premises.

69. In 2009, the regulator auctioned radio spectrum for the provision of broadband wireless access services. The three successful bidders/licensees are in the process of establishing network infrastructures to provide mobile broadband services based on fourth-generation mobile technology.

70. Under the CEPA HKSAR service suppliers may establish joint ventures in China (with a maximum shareholding of 50%) to provide five types of value-added telecommunications services without geographic restriction. These services include internet data centre services, store and forward services, call centre services, internet access services, and content services. Since January 2008, HKSAR service suppliers have been allowed to provide Mainland-IP-based virtual private network

37 They include China Mobile Hong Kong Company Limited, CSL Limited, PCCW-HKT Telephone Limited & Hong Kong Telecommunications (HKT) Limited, Hutchison Telephone Company Limited, and SmarTone Mobile Communications Limited. WT/TPR/S/241/Rev.1 Trade Policy Review Page 72

(VPN) services in the form of joint ventures, with a maximum shareholding of 50% and without geographic restriction. From 1 October 2009, Hong Kong service suppliers have been permitted to distribute in the Guangdong province fixed and mobile telephone service cards, which can only be used in Hong Kong, China.

Regulatory framework

71. The Telecommunications Authority (TA) is a statutory body responsible for regulating the telecommunications industry, including enforcing fair competition rules. The OFTA is its executive arm. Its regulatory principles are based on a market-driven approach; regulation should not impede market developments, should be technology-neutral and should not discriminate between classes of operators; intervention should be proportional and minimal. The main changes of the regulatory regime during the review period were in licensing and the interconnection policy.

72. A new Unified Carrier Licence (UCL) was introduced on 1 August 2008 for the licensing of facility-based operators for the provision of fixed or mobile services (to replace fixed carrier, mobile carrier and public radio-communications system licences upon their expiry). Facility-based operators are those who establish their own networks for the provision of public telecommunications services. A harmonized licence fee structure and licence conditions applies for fixed and mobile services. As of June 2010, there were 24 UCL holders.

73. An updated services-based operator (SBO) licence was implemented in October 2009 as a single, harmonized licensing regime for service-based operators of public telecommunications services. Service-based operators are telecoms services providers who rely on fixed or mobile networks established by facility-based operators.38

74. The provision of internet protocol telephony services (VoIP services) has been authorized under the SBO licensing regime since January 2006.39 This has enhanced market competition in voice and data communications services, and consumers now benefit from an increased range of communications choices.

75. In July 2008, the mandatory "Type II" interconnection policy was withdrawn. Type II (facilities-based) interconnection requires the incumbent fixed network operator to open its copper-based customer access network to new entrants so that they can provide competing services in the start-up phase, while building their own networks. In 2003, the Government carried out a review of the policy, considering that its continuation was justified only if the benefits of facilitating effective competition and enhancing consumer choice outweighed any potential dampening of incentives for investment in network infrastructure. The Government decided in July 2004 that the regulatory intervention under the Type II interconnection policy should be withdrawn gradually with full withdrawal on 30 June 2008 (except for buildings meeting the "essential facilities criterion" that justifies mandatory Type II interconnection in the consumer interest).

38 Service-based operators were previously licensed under two types of licences: the Public Non-Exclusive Telecommunications Services (PNETS) licence (for the provision of value-added services and external telecommunications services provided over the facilities of other licensed fixed network operators, or Mobile Virtual Network Operator (MVNO) services over the facilities of mobile network operators); and the Services-Based Operator (SBO) licence (for the provision of local voice telephony services and non-mobile PNETS-type services). 39 VoIP services refer to telecoms services that integrate voice with other types of communications such as data, text, image, video or multimedia conveyed partially or wholly over the Internet. These services may include real-time voice and data communications in three different configurations, i.e. computer-to- computer, computer-to-phone and vice versa, and phone-to-phone. Hong Kong, China WT/TPR/S/241/Rev.1 Page 73

76. In the wake of "fixed mobile convergence" (FMC), recent technological and market developments have increasingly blurred the distinction between fixed and mobile networks and services. The prevailing asymmetric regulatory guidance on interconnection charges between fixed and mobile operators, i.e. fixed-to-mobile interconnection charges (FMIC), which was based on the mobile party's network pays (MPNP) approach40, was considered no longer conducive to investment in an FMC environment. In line with Government's market-driven regulatory approach, the regulatory guidance on FMIC was withdrawn on 27 April 2009 after a two-year transitional period for operators to adapt to the change. With the deregulation of FMIC, interconnection charges between fixed and mobile network operators are now subject to commercial negotiations. However, failing an agreement, the parties may request a determination of the terms and conditions of interconnection by the TA (pursuant to Section 36A of the Telecommunications Ordinance). The TA also reserved the right to use its regulatory powers as a last resort, should the new policy prove unsuccessful.

77. Fixed-to-fixed interconnection remains regulated while mobile-to-mobile interconnections have never been regulated. The interconnection agreements between the incumbent operator (PCCW-HKT Telephone Limited & Hong Kong Telecommunications (HKT) Limited) and other operators are published.

78. The current universal service obligation (USO) regime was established by the TA in 1998 (and last amended in June 2007) to ensure non-discriminatory access to affordable basic telephone services for consumers anywhere in the territory. The scope of the universal basic telecommunications services consists essentially of fixed telephone line service and public payphone service. PCCW-HKT is the sole designated universal services provider in the territory and is compensated for the net cost of providing the basic service to customers under a universal service contribution (USC) arrangement. The USC is paid by all providers of local fixed and mobile telecommunications services, including facility-based and service-based operators, who are required to share the cost of the USO based on the quantity of telephone numbers allocated to them.

79. As a result of increasing convergence between telecommunications and broadcasting services the Government of Hong Kong, China decided to review the associated regulatory regimes. As the first step, in line with the practices of other advanced economies, it has proposed establishment of a unified regulator for the two sectors, the Communications Authority (CA), by merging the Telecommunications Authority (TA) and the Broadcasting Authority (BA). The Government introduced the relevant enabling legislation, the CA Bill, into the Legislative Council in June 2010.

80. The Unsolicited Electronic Messages Ordinance, which entered into force on 22 December 2007, allows consumers to register if they do not wish to receive SMSs, faxes, and pre-recorded telephone messages. Violations are liable to fines ranging from HK$100,000 to HK$500,000 for repeat offences.

(iv) Transport

(a) Maritime transport

81. Hong Kong, China continues to be one of the leading hub ports in the Pearl River Delta and the Asia Pacific region, owing to (amongst other things) its strategic location, free port status, transparent and efficient customs clearance, well-developed infrastructure, and full intermodal connectivity. It is strategically located on the Far East trade routes within the Asia Pacific basin, and

40 Under MPNP, each mobile network operator is responsible for paying the FMIC for traffic conveyed between other fixed networks and itself, for both outgoing calls from its network to the fixed networks and incoming calls from fixed networks to its network. WT/TPR/S/241/Rev.1 Trade Policy Review Page 74

is served by some 90 international shipping lines with about 400 liner services per week, connecting to over 500 destinations worldwide. Of these, about 210 are intra-Asia shipping services. About 70% of the freight handled by Hong Kong port is transhipment cargo to or from South China, mainly the Pearl River Delta region (Table IV.6). There is no significant cabotage trade.

Table IV.6 Port traffic, 2005-09 2005 2006 2007 2008 2009

Arrival of vessels (number) Ocean vessels 39,135 39,016 37,152 35,853 33,157 River cargo vessels 117,490 116,137 108,945 100,613 89,750 River passenger ferry 75,187 75,807 79,894 80,896 82,598 Arrival of vessels (annual % change) Ocean vessels 9.0 -0.3 -4.8 -3.5 -7.5 River cargo vessels 0.0 -1.2 -6.2 -7.6 -10.8 River passenger ferry 4.5 0.8 5.4 1.3 2.1 Total freight movement ('000 tonnes) 230,139 238,238 245,433 259,402 242,967 of which: Seaborne (%) 70.2 69.8 72.3 69.4 66.5 River (%) 29.8 30.2 27.7 30.6 33.5 Total freight movement (annual % change) 4.2 3.5 3.0 5.7 -6.3 Seaborne 1.8 2.9 6.7 1.5 -10.2 River 10.3 4.9 -5.5 16.7 2.5 a Total container throughput ('000 TEUs ) 22,602 23,539 23,998 24,494 21,040 (annual % change) 2.8 4.1 2.0 2.1 -14.1 b Percentage of containerization for seaborne cargo 75.5 77.7 78.9 80.7 76.9 Direct shipment 31.0 28.8 26.5 24.7 23.2 Transhipment 44.5 48.9 52.4 56.0 53.7 a TEU = Twenty-foot-Equivalent Unit (based on a standardized container size of 20 feet (length) * 8 feet (width)). b Percentage of containerization = containerized cargo divided by total cargo. Source: HKSAR Marine Department, Port and Maritime Statistics online information. Viewed at: http://www.mardep. gov.hk/en/publication/portstat.html#2 [20/05/2010].

82. Since 2007, Hong Kong, China's container port has been ranked third in the world after Singapore and Shanghai in terms of throughput.41 Container throughput at the port has generally followed an increasing trend in the past few years, although in 2009 it was affected by the global financial crisis (Table IV.6). Hong Kong Port has a reputation for efficient cargo handling operations with an average turnaround time of about 14 hours for container vessels.

83. The port is vital for the HKSAR economy. It handled 25% of Hong Kong, China's total freight in value terms and 89% in tonnage terms in 2009 (Chart IV.4). The port and the related sectors directly contributed 1.7% to GDP in 2008 and 3.1% of total employment (about 110 000 jobs)42, reflecting its relatively more labour-intensive nature (in particular haulage of containers, other inland transport of water-borne cargo, and other supporting services to water transport). The port also supports the operation of the trading and logistics sector (one of the

41 Hong Kong Port Development Council (2010). 42 This includes ship agents; owners and operators of sea-going vessels/Hong Kong, China-Macao, China vessels; operators of harbour ferries and miscellaneous inland water transport services; companies in the container business; and companies providing sea cargo forwarding services and other supporting services to water transport. Hong Kong, China WT/TPR/S/241/Rev.1 Page 75

four pillar industries of the economy), which accounted for 26% of GDP and 24% of total employment (about 830 000 jobs) in 2008. 84. The HKSAR Government is committed to strengthening Hong Kong's position as a hub port in the region, and enhancing its competitiveness as an international maritime centre in the face of intense competition from neighbouring ports, such as Singapore, Shanghai, and Shenzhen. The feasibility of developing an additional container terminal is being studied, and the container terminal area and its approach channels are to be dredged to meet the draught requirements of the new generation of ultra-large container ships. The Government also continues to invest in infrastructure to improve the intermodal connection of Hong Kong port. One example is the construction of the Hong Kong–Zhuhai–Macao Bridge, which began in December 2009. The bridge will significantly shorten the travelling distance and time between the western part of the Pearl River Delta and the container terminals.

Chart IV.4 External trade by mode of transport, 2009 (Per cent of total import/export value)

Air 35.3%

Sea Other 24.9% 0.8%

River 3.8%

Land 35.3%

Note: Other includes trade by hand-carried and parcel post.

Source : Census and Statistics Department online information. Viewed at: http://www.censtatd.gov.hk [10 May 2010].

85. All maritime policy and administrative decisions are made in the HKSAR. The Hong Kong Port Development Council (PDC) and the Hong Kong Maritime Industry Council (MIC) are high-level advisory bodies to the Government. They are chaired by the Secretary for Transport and Housing and comprise key players from the private sector and government officials.

86. There are no restrictions on foreign direct investment in port facilities or maritime services, nor exceptions to national treatment. Nor are there any market access restrictions for multimodal transport operators, general and bulk shipping lines, shippers, and intermediaries, to rent or lease trucks, railway carriages, or barges and related equipment for inland forwarding of cargo.

87. Under the CEPA, HKSAR service suppliers (HKSS) are benefiting from preferential access to the market for maritime transport services in China. During the review period, further liberalizing WT/TPR/S/241/Rev.1 Trade Policy Review Page 76

measures were introduced under CEPA. These allow HKSS to set up joint ventures to provide third-party international shipping agency services in China, of which the shareholding of HKSS should not exceed 51% (effective January 2008 under CEPA Supplement IV); allow HKSS wholly owned companies and their branches to provide shipping agency services to vessel operators for routes between Guangdong Province and Hong Kong, China/Macao, China (effective January 2009 under CEPA Supplement V); allow HKSS to set up wholly owned shipping companies in China to provide regular business services such as shipping undertaking, issuance of bills of lading, settlement of freight rates and signing of service contracts, for shipping transport between Hong Kong, China and Class B ports in Guangdong operated by HKSS using chartered Mainland vessels (effective October 2009 under CEPA Supplement VI). At end-June 2010, 190 HKSS certificates had been granted for maritime transport services. Hong Kong registered ships benefit from preferential dues in Mainland ports under a memorandum signed with the Mainland authorities.

88. Hong Kong, China has implemented the U.S. Container Security Initiative (launched in 2003) for the pre-screening of high-risk U.S.-bound containers. Hong Kong, China also participated in the U.S. Secure Freight Initiative between November 2007 and April 2009, under which U.S.-bound containers were scanned on a voluntary basis in a designated container terminal, to detect any illicit trafficking of nuclear or radioactive materials. The Import and Export Ordinance (Cap. 60) was amended with effect from 24 December 2009 to close regulatory loopholes and strengthen enforcement related to combating maritime smuggling.

Port administration and port services

89. The Marine Department of the HKSAR Government is responsible for port administration. It provides public services and facilities, including mooring buoys, anchorage, and two cross-boundary ferry terminals, and is responsible for ensuring compliance with safety and environmental standards. Pilotage service is compulsory for ships in excess of 3,000 gross tonnes, and gas carriers of any tonnage (Chapter III(4)(iii)).43

90. Hong Kong, China's port facilities are financed, owned, and operated by the private sector, while the role of the Government has been to undertake long-term strategic planning for port facilities and to provide the necessary supporting infrastructure. There are currently nine container terminals, which are privately owned and operated by five operators (Hongkong International Terminal Ltd. (HIT), Modern Terminals Ltd., COSCO-HIT Terminals Ltd, DP World, and Asia Container Terminals Ltd.).

91. The frequency of shipping calls is a critical factor affecting the efficiency of port operations. To strengthen the port's attractiveness and avert cargo diversion to competing ports, in 2009 the Government reduced the statutory fees and charges for port services, and licensing fees for vessels and seafarers. According to the authorities, Hong Kong, China's port costs are among the lowest in the world. In late 2009, the pilotage dues were reduced from HK$1,900 to HK$1,820 for a period of 18 months. Operators of local (non-ocean going) passenger and cargo vessels have benefited from a licence fee waiver scheme implemented by the HKSAR Government in response to the global economic downturn.44

43 For an inventory of Hong Kong, China's shipping ordinances and legislation, see Marine Department online information. Viewed at: http://www.mardep.gov.hk/en/publication/home.html. 44 A new Merchant Shipping (Local Vessels) Ordinance entered into force in January 2007, regulating the licensing and management of local vessels. Hong Kong, China WT/TPR/S/241/Rev.1 Page 77

Shipping services

92. Hong Kong, China is the world's eighth largest maritime centre in terms of the fleets owned, accounting for 3% of the global merchant fleet. Moreover, the members of the Hong Kong Shipowners Association own, manage or operate about 1,750 vessels of 109.9 million deadweight tonnes, accounting for about 8% of the world's merchant fleet. About 77% of sea cargo are handled by liner services (i.e. containerized sea-borne cargo).

93. The Marine Department maintains the Hong Kong Shipping Register (HKSR), which is independent from the Mainland (Article 125 of the Basic Law). At end 2009, 1,496 vessels of 44.9 million gross tonnage were registered with the HKSR, representing an increase of 13% over end 2008. A ship must be registered in Hong Kong, China to fly the Hong Kong, China flag. The requirements for registration are: that a majority interest in the ship is owned by a HKSAR citizen, or a Hong Kong incorporated company, or a non-Hong Kong company registered in the HKSAR, or the ship is on charter to such a company; a representative person, either the owner or a locally incorporated ship management company, is appointed in relation to the ship; and the ship's safety and pollution levels are satisfactory.

94. In addition, about 14,100 vessels are licensed to carry passengers and cargo in Hong Kong, China waters or in the Pearl River Delta region (referred to as local or river trade vessels). As river trade is more cost-effective transport than by truck, there has been a rise in river trade for cross-boundary transport (Table IV.6).

95. About 700 shipping-related companies are operating in Hong Kong, China, providing a variety of maritime services, including shipping agency and management, and local representative offices of overseas shipping companies; ship owning and operation; maritime insurance; ship broking, and inland water transport. Other related services, such as legal services, arbitration, ship financing, ship registration, and ship surveying are also available.

96. Hong Kong, China is a major centre in Asia for solving disputes by arbitration. The New York Convention applies to Hong Kong, China and its arbitration awards by the Hong Kong International Arbitration Centre are enforceable in all signatory states. The Government has also signed an agreement with China for the reciprocal enforcement of arbitration awards.

(b) Air transport

97. Hong Kong International Airport (HKIA) is the world's third busiest airport in terms of international passenger throughput after London's Heathrow Airport and Charles de Gaulle Airport in Paris. It has been the world's leading airport in terms of international cargo throughput since 1996. Over 90 airlines operate about 5,700 flights weekly, linking HKIA to more than 150 destinations worldwide, including about 40 cities on the Mainland. The air transport sector accounted for 1.7% of GDP and 1.3% of employment in 2008. The global financial crisis had an adverse effect on air traffic in 2008-09 (Table IV.7).45

45 Airports Council International online information. Viewed at: http://www.airports.org/cda/ aci_common/display/main/aci_content07_c.jsp?zn=aci&cp=1-5-212-218-222_666_2__; and HKTDC online information. Viewed at: http://www.hktdc.com/info/mi/a/hkip/en/1X0018JT/1/Hong-Kong-Industry-Profiles/ Air-Transport.htm. WT/TPR/S/241/Rev.1 Trade Policy Review Page 78

98. Air transport continues to play an important role in Hong Kong, China's merchandise trade. Although air freight accounts for only about 1% of total cargo by weight, in value terms, 31% of total exports and 39% of imports were carried by air in 2009 (Chart IV.4).46

Table IV.7 Air transport, 2006-09 2006 2007 2008 2009

Air cargo throughput (million tonnes) 3.58 3.74 3.63 3.35 No. of passenger handled (million) 43.27 46.30 47.14 45.00 (Annual %age change) Total freight movement 5.2 4.5 -3.1 -7.7 Inward 4.4 4.0 -1.9 -4.8 Outward 5.7 4.8 -3.7 -9.4

Source: Census and Statistics Department online information. Viewed at: http://www.censtatd.gov.hk.

Air services

99. Hong Kong, China's air transport system is regulated and monitored by the Civil Aviation Department (CAD) of the HKSAR Government. The CAD also provides air navigation services and air traffic control services at HKIA.

100. To provide air services (to and from Hong Kong, China) as a designated HKSAR airline, an airline must be incorporated and have its principal place of business in HKSAR (Article 133 of the Basic Law), and hold an Air Operator's Certificate issued by the CAD. In 2010, nine airlines held an Air Operator's Certificate: Cathay Pacific Airways47, Hong Kong Dragon Airlines48, Hong Kong Airlines, Hong Kong Express Airways, Air Hong Kong, Metrojet, Tag Aviation, and helicopter operators Sky Shuttle and Heliservices. Designated HKSAR airlines do not have exclusive access to routes, nor do they receive subsidies or any other form of assistance.

101. The provision of scheduled air services is regulated by bilateral air services agreements (ASAs) and arrangements between the HKSAR and its aviation partners.49 The HKSAR Government has signed 61 bilateral ASAs.50

46 HKTDC online information. Viewed at: http://www.hktdc.com/info/mi/a/hkip/en/ 1X0018JT/1/Hong-Kong-Industry-Profiles/Air-Transport.htm. Major items exported by air include electronics and their parts and components, telecommunications equipment, apparel and clothing accessories, jewellery (finished and unfinished), timepieces and eyewear; major import goods include electronics and their parts and components, telecommunications equipment, jewellery (finished and unfinished), timepieces, toys, and sporting goods. 47 The Government owns a small percentage of Cathay Pacific Airways' stocks, but has no management rights in the airline. 48 Hong Kong Dragon Airlines is a 100% subsidiary of the Cathay Pacific Airways; the airline is a regional carrier. 49 Under the Basic Law of the HKSAR (Article 133), acting under specific authorization from the Central People's Government, the Government of the HKSAR may negotiate and conclude new air services agreements providing routes for airlines incorporated and having their principal place of business in Hong Kong, China. Such agreements cover scheduled air services to, from or through Hong Kong, China, which do not operate to, from or through the Mainland of China. According to Article 132 of the Basic Law, all air service agreements providing air services between other parts of China and other states and regions with stops at the HKSAR, and air services between the HKSAR and other states and regions with stops at other parts of China shall be concluded by the Central People's Government. 50 Department of Justice online information. Viewed at: http://www.legislation.gov.hk/table1ti.htm. Hong Kong, China WT/TPR/S/241/Rev.1 Page 79

102. The HKSAR Government has adopted a progressive liberalization policy on air services. It has secured unlimited capacity for third and fourth freedom rights with 21 aviation partners, and is prepared to exchange fifth freedom rights with aviation partners when it serves the overall interests of Hong Kong, China. Since the air traffic regime of the HKSAR has been significantly liberalized, many major routes are operated by more than one local airline, as well as competing foreign airlines. As a result, air routes out of the HKSAR are, in general, competitive. Multiple designation applies to 59 of the 61 ASAs. Hong Kong, China also maintains a liberal approach to commercial cooperation between airlines, including code-sharing.

103. Tariffs for scheduled air services (including passenger and cargo fares, and commissions rates paid to agents for air tickets on scheduled air services) are subject to approval by the aeronautical authorities of both parties. In response to tightened competition legislation in the EU and the United States, airlines have changed their practice of making joint applications for cargo fuel surcharges; since 2007, applications are filed separately.

104. Since 2006, more liberal air services arrangements have been reached with Belgium, Brazil, Brunei, China, Germany, India, Japan, Jordan, Republic of Korea, Luxembourg, Mauritius, Nepal, the Netherlands, Qatar, Russia, Sri Lanka, and the UAE.51 Among these, the more significant liberalization includes unlimited capacity with Brunei, Jordan, the UAE, Sri Lanka, and Japan (except Tokyo52), and unlimited all-cargo capacity with Germany, Belgium, Nepal, and China. New ASAs were signed with Ethiopia, Kazakhstan, the Maldives, Laos, Mexico, and Fiji (the last two with unlimited passenger and all-cargo capacities).

105. The current air services arrangements with China provide a framework for scheduled services between Hong Kong, China and 57 airports on the Mainland. Since 2006, the arrangements were expanded to provide unlimited all-cargo capacity to all airports and unlimited capacity for passenger services to 50 airports, while the capacity for 7 busy airports were increased substantially. Air services between Hong Kong, China and Chinese Taipei are governed by a commercial arrangement between airlines of both parties.

106. An HKSAR airline seeking to operate scheduled services must obtain a route-specific licence from the Air Transport Licensing Authority (ATLA), an independent statutory body established under the Air Transport (Licensing of Air Services) Regulations. Once licensed, it is eligible for designation by the Government of the HKSAR under the relevant ASA, and for allocation of traffic rights. When processing licence applications, ATLA is required to have regard to the coordination and development of air services generally with the object of ensuring the most effective service to the public while avoiding uneconomic overlapping of air services.53 Among other factors, ATLA is required to take into account the financial resources of the applicant.

107. Airlines, other than designated HKSAR airlines, wishing to operate scheduled air services between the HKSAR and a foreign country must satisfy all requirements in the country of registration and obtain an operating permit from the Government's Director-General of Civil Aviation. Airlines seeking to operate non-scheduled services to and from the HKSAR must apply for a permit from the Director-General of Civil Aviation. Hong Kong, China has adopted a liberal approach to allow and facilitate operation of both passenger and freight charter services, which supplement or complement

51 These include increased capacities, liberal routings, provision for code-sharing and other commercial arrangements, etc. 52 The capacity between Hong Kong, China and Tokyo is subject to restrictions. 53 ATLA is proposing to remove the elements of "co-ordination of air services" and "the avoidance of uneconomical overlapping of air services" from its general policy, as these matters should be addressed through market competition. WT/TPR/S/241/Rev.1 Trade Policy Review Page 80

scheduled services, on the basis of reciprocity. There are no restrictions on providers of Computer Reservation Systems.

Airport management and ground-handling services

108. The HKIA is operated by the Airport Authority (AA) under an aerodrome licence issued by the CAD. The AA is a statutory corporation wholly owned by the Government and is required under the Airport Authority Ordinance (Cap. 483) to conduct its business according to prudent commercial principles. An initiative to partially privatize the AA has been put on hold. Since 2001, the AA has launched the New Destination Incentive Arrangement, offering a rebate on landing charges to airlines operating scheduled flights to new destinations. Hong Kong, China has also invested in transport links to strengthen its gateway position to the Mainland. The airport has established cross-boundary ferry services between the SkyPier at HKIA and eight ports in the Pearl River Delta region, including Macao, China. This allows passengers to connect with international flights at HKIA. The airport also offers 460 daily round-trip coach services to 115 Mainland cities and towns.

109. The AA is authorized to conduct airport-related activities on the artificial island where the airport is located, while outside activities are subject to restrictions in the Airport Authority (Permitted Airport-related Activities) Order (Cap. 483).54 Airport support services, such as ground handling, maintenance and repair of aircraft, or air cargo at the HKIA, are provided by third parties granted franchises by the AA through a competitive open bidding process. There are currently ten airfield- related licensees and franchisees. The AA periodically assesses the demand for services, and allows entry of additional operators if necessary. Subject to operational considerations, such as space and efficiency, airlines may also apply for permission to provide these services themselves. Governments other than the Government of the HKSAR may not hold majority shares or control franchisees that provide certain categories of ground-handling services at HKIA.

110. Aircraft base maintenance and repair services are provided by Hong Kong Aircraft Engineering Co. Ltd (HAECO), China Aircraft Services Ltd. (CASL), and Pan Asia Pacific Aviation Services Ltd. (PAPAS). Self-handling by airlines on technical line maintenance and passenger handling services are allowed.

111. HKIA currently has three cargo terminals, operated by Asia Airfreight Terminal Limited (AAT) and Hong Kong Air Cargo Terminals Limited (HACTL), as well as a dedicated express cargo terminal operated by DHL Central Asia Hub. Cathay Pacific Services Limited is currently building a new cargo terminal, which will increase annual handling capacity from currently 4.8 million tonnes to about 7.4 million tonnes by 2013.

112. Under the CEPA, HKSSs have been allowed to establish wholly owned operations on the Mainland to provide: contract management services for small and medium-sized airports; airport management training and consultation services, and seven types of air transport ground services.55 Since 2006, air transport services-related business has been further liberalized under CEPA. As from January 2008 (CEPA Supplement IV), HKSSs are permitted to establish, subject to an economic needs test, joint ventures in China with Mainland Computer Reservation System (CRS) service suppliers. They may also set up wholly owned companies to provide air transport sales agency services on international routes, and with effect from 1 January 2011 for domestic routes on the Mainland (CEPA Supplement VII). The latest CEPA Supplement also allows HKSSs to operate

54 Permitted activities include alliance or cooperation with other airports; acquisition of interests in other airports in China; provision of advisory or consultancy services to another airport; and operation of carriage and logistics services. 55 WTO (2007). Hong Kong, China WT/TPR/S/241/Rev.1 Page 81

aircraft repair and maintenance services on the Mainland. As of end-May 2010, 131 HKSS certificates had been granted for air transport services; 109 were issued between June 2007 and May 2010.

(v) Tourism

113. Tourism is one of Hong Kong, China's four pillar industries and one of its largest earners of foreign exchange (Table IV.8). The direct economic contribution of inbound and outbound tourism in 2008 (i.e. the value-added of tourism-related services56) is estimated at HK$43.8 billion (2.8% of GDP). Over 200,000 people (5.7% of total employment) are employed directly in the tourism industry57, which shows that tourism is a labour-intensive industry that generates employment opportunities. Mainland China accounts for most visitor arrivals, with an average annual growth rate of about 14% since 2004.

Table IV.8 Tourism and hotel statistics, 2005-09 2005 2006 2007 2008 2009

Total visitor arrivals ('000) 23,359 25,251 28,169 29,507 29,591 By origin (%) China 53.7 53.8 55.0 57.1 60.7 Chinese Taipei 9.1 8.6 7.9 7.6 6.8 Japan 5.2 5.2 4.7 4.5 4.1 United States 4.9 4.6 4.4 3.9 3.6 Macao, China 2.2 2.3 2.2 2.4 2.3 Korea, Rep. of 2.8 2.8 3.1 3.1 2.1 Singapore 2.5 2.3 2.2 2.1 2.1 Australia 2.2 2.2 2.2 2.2 2.0 Philippines 1.7 1.8 2.0 1.9 1.9 United Kingdom 2.0 2.0 2.1 1.9 1.7 Malaysia 1.7 1.8 1.8 1.7 1.5 Other 12.0 12.6 12.3 11.6 11.2 By mode of transport (%) Land 54.7 53.7 53.8 55.6 59.6 Air 33.4 34.1 32.7 30.9 29.1 Sea 11.9 12.2 13.5 13.5 11.3 Average length of stay (nights) 3.7 3.5 3.3 3.3 3.2 Overnight visitor spending (HK$ million) 68,888 75,926 87,868 94,206 97,664 By use (%) Shopping 52.9 53.2 56.7 57.3 63.6 Hotel bills 22.2 23.6 22.5 21.7 16.7 Meals outside hotels 14.1 13.2 11.9 11.8 10.9 Other 10.8 10.0 8.9 9.2 8.8 Overnight visitor per capita spending (HK$) 4,663 4,799 5,122 5,439 5,770 Table IV.8 (cont'd)

56 Tourism covers inbound tourism and outbound tourism. Inbound tourism covers retail trade, hotels and boarding houses, restaurants, other personal services, travel and airline ticket agents, and passenger transport services for visitors. Outbound tourism covers travel and airline ticket agents as well as cross- boundary passenger transport services for Hong Kong residents travelling abroad. 57 Census and Statistics Department online information. Viewed at: http://www.censtatd.gov.hk/hong_ kong_statistics/four_key_industries/index.jsp. WT/TPR/S/241/Rev.1 Trade Policy Review Page 82

2005 2006 2007 2008 2009

Purpose of overnight visit (%) Vacation 50.0 52.0 55.0 55.0 56.0 Visting friends/relatives 19.0 18.0 19.0 19.0 20.0 Business 24.0 24.0 20.0 21.0 18.0 Other 6.0 6.0 5.0 5.0 6.0 Same-day in-town visitor spending (HK$ million) 6,935 9,547 13,615 18,217 22,691 By use (%) Shopping 82.6 85.5 86.2 88.1 88.4 Meals outside hotels 7.3 5.9 6.2 5.6 3.7 Hotel bills 1.2 1.1 0.8 0.7 0.5 Other 8.9 7.5 6.7 5.6 7.4 Same-day in-town visitor per capita spending (HK$) 810 1,015 1,239 1,498 1,798 Total expenditure associated to inbound tourism 106.0 120.7 142.2 157.8 162.9 (HK$ billion) High tariff A hotels Number of hotels 21 21 21 24 27 Number of rooms 10,808 10,809 10,855 13,570 15,116 Room occupancy rate (%) 84 85 84 79 72 High tariff B hotels Number of hotels 39 41 43 48 55 Number of rooms 18,616 18,478 18,951 18,468 21,638 Room occupancy rate (%) 86 88 88 87 81 Medium tariff hotels Number of hotels 49 53 60 66 71 Number of rooms 11,475 14,435 15,496 16,735 17,342 Room occupancy rate (%) 87 87 86 86 80 Unclassified Number of hotels 9 11 16 11 14 Number of rooms 2,967 3,406 6,279 6,031 5,531 Tourist guest houses Number of tourist guest houses 468 486 511 546 591 Number of rooms 5,025 5,384 5,068 5,469 5,759 Room occupancy rate (%) 79 79 73 78 70 All categories Number of hotels and tourist guest houses 586 612 651 695 758 Number of rooms 48,891 52,512 56,649 60,273 65,386 Room occupancy rate (%) 86 87 86 85 78

Source: Hong Kong Tourism Board and Tourism Commission online information.

114. The Government attaches particular importance to the development of tourism. A key element of its strategy is to further facilitate tourism from the Mainland. In July 2003, China introduced the Individual Visit Scheme (IVS) within the framework of CEPA, allowing residents of designated cities to visit HKSAR as independent travellers (instead of travelling as part of tour groups). This scheme has been extended gradually and now covers 49 Mainland cities, including all cities in Guangdong Province, as well as major cities including Shanghai or Beijing. Overall, IVS arrivals have increased from 35% of all Mainland arrivals in 2004 to 62.8% in the first three months of 2010. The IVS has generated additional tourist spending estimated at HK$84.8 billion in 2004-09.

115. Travel arrangements have also been further liberalized for residents of nearby Shenzhen on Mainland China. The new measures permit, inter alia, Mainland-approved tour operators to organize group visits to HKSAR for eligible non-permanent Shenzhen residents. Mainland residents normally Hong Kong, China WT/TPR/S/241/Rev.1 Page 83

need to apply for exit endorsements for outbound travel (including to Hong Kong, China) in the city where their residential status is registered and may only join outbound tours from their home city. Under this measure, non-permanent residents living in Shenzhen may join tours directly, without having to go back to their home city, therefore facilitating their travel to the HKSAR. This measure, implemented on 15 December 2008, was extended in February 2009 to cover eligible residents' close relatives.

116. The Mainland also introduced a one-year multiple-entry IVS endorsement for eligible permanent Shenzhen residents. Normal IVS endorsements for Guangdong residents (including those in Shenzhen) are valid either for three months or one year, during which the holder may undertake a maximum of eight visits to Hong Kong, China in a one-year period. Under the new multiple-entry IVS endorsement visits to Hong Kong, China by Shenzhen permanent residents are not limited during that one-year period. This facilitates frequent visits and, since its implementation on 1 April 2009, more than 3.2 million Shenzhen permanent residents have visited Hong Kong, China with this endorsement. Another measure allows non-Guangdong residents ordinarily residing in Shenzhen to apply for IVS endorsements in Shenzhen to visit Hong Kong, China, without going back to their home cities for the application.

117. As from 1 January 2011 (CEPA Supplement VII), Hong Kong, China travel agents established in Beijing and Shanghai may operate, on a pilot basis, group tours to Hong Kong, China, as well as Macao, China for registered permanent residents of Beijing and Shanghai. This is in addition to the existing arrangement under which the Hong Kong, China travel agents operate group tours for residents in the nine provinces of the Pan-Pearl River Delta region.58

118. The HKSAR Government aims to develop Hong Kong, China into a regional cruise hub. A new cruise terminal at Kai Tak, capable of berthing the largest cruise vessel in the world, is expected to be opened in mid-2013.

119. The Government has made available additional resources to attract more MICE events (meetings, incentive travel, conventions, and exhibitions) to Hong Kong, China.59 The Hotel Accommodation Tax was waived with effect from 1 July 2008 to promote tourism and enhance the competitiveness of the hotel industry. In 2009, the Government also set up the HK$100 million Mega Events Fund to sponsor local non-profit organizations in staging large-scale arts, cultural, and sports events in Hong Kong, China. In addition, the Government is seeking to strengthen the city's position as a premier destination for fine food and wine, and reinforce Hong Kong, China as a wine trading and distribution hub in the region (Chapter III(2)(iii)(a)).

120. Since its last Review, Hong Kong, China has diversified its range of tourist attractions. The Hong Kong Wetland Park, Ngong Ping 360, and the Hong Kong National Geopark have been added to the tourism map, and the Ocean Park has been implementing a redevelopment project, which will double the number of its attractions (to 70 in phases from 2007 to 2012).

121. The Tourism Commission of the HKSAR Government is responsible for formulating tourism development policy and strategy. The HKTB, a statutory body established under the Hong Kong

58 The provinces of Fujian, Jiangxi, Hunan, Guangdong, Hainan, Sichuan, Guizhou, Yunnan, and the Guangxi Zhuang Autonomous Region. 59 In the 2008-09 Budget, the Government earmarked an additional HK$150 million over the following five years to enhance the appeal of Hong Kong, China as an international MICE capital and to seek to host more mega international conventions and exhibitions. For 2008-11, a total of HK$90 million has been allocated to the Hong Kong Tourist Board to carry out the above tasks. WT/TPR/S/241/Rev.1 Trade Policy Review Page 84

Tourism Board Ordinance, and fully funded by the Government, is responsible for marketing and promoting Hong Kong, China as a tourist destination.

122. The HKTB maintains a hotel classification system, which gives a composite score to a hotel based on five key indicators: achieved room rates; staff-to-room ratio; location; facilities; and the business mix. Based on the composite scores, hotels are classified into three categories. While the HKTB does not make public the listings of hotels by category, individual hotels are informed of their category so that they can compare their performance against their category averages.

123. A licensing and regulatory regime (mainly codes of conduct and directives) applies to travel agents (persons/companies) operating inbound or outbound travel business under the Travel Agents Ordinance (Cap. 218), which is implemented by the Travel Agents Registry (TAR) and the Travel Industry Council of Hong Kong (TIC). Tourist guides must obtain accreditation from the TIC and a Tourist Guide Pass (valid for three years).

(vi) Development of new industries

124. In October 2008, the HKSAR Government established the Task Force on Economic Challenges (TFEC) to assess the impact of the global financial crisis on Hong Kong, China's economy and major industries. It was also invited to propose specific options for the HKSAR Government and business community to address the challenges arising from the crisis, with a view to enhancing Hong Kong, China's competitiveness and exploiting new business opportunities.

125. The TFEC examined, among other things, the economic areas where Hong Kong, China would have a development potential and enjoys "competitive advantages", and recommended the further development of six industries (testing and certification; medical services; innovation and technology (covered in Chapter I(1) and Chapter III(4)(ii)); cultural and creative industries; environmental services; and education services). The TFEC considered a number of factors, including: (i) the economic area concerned should be able to benefit Hong Kong, China's economy in the medium to long term, be built on the existing economic pillars and related industries, and fill or create niche markets best served by Hong Kong, China given its competitive advantages; (ii) the economic area should be able to thrive and sustain in a free and open market without relying on continued support from government; and (iii) the potential of the economic area should be assessed by its viability and readiness for development.

126. The TFEC made reference to relevant research studies conducted by the Government and other research institutes, the Commission on Strategic Development (CSD), academic literature, statistical data, as well as the views of the public, the industries, and other stakeholders. The TFEC recommendations were discussed in forums and meetings held by the Government and the CSD. They were published in June 2009 and accepted by the HKSAR Government.

127. In line with the principle of "Big Market, Small Government", the Government's strategy is to remove barriers to the selected industries and help them tap into new markets. The Government has also been examining whether the existing resources can support the further development of these industries, and factors of production are tied up by outdated policies and economic structures. The relevant policy bureaus of the HKSAR Government have developed and are implementing specific measures, some of which may also benefit Hong Kong, China's economic development in general.

(a) Testing and certification services

128. The HKSAR Government has identified the testing and certification services industry as one of six industries where it believes Hong Kong, China has "competitive advantages". Its objective is to Hong Kong, China WT/TPR/S/241/Rev.1 Page 85

promote Hong Kong, China as a leading testing and certification centre in the region by, inter alia, attracting foreign conformity assessment bodies to establish branches in Hong Kong, China. While Hong Kong, China has not made any specific commitments under the GATS with respect to testing services (CPC 8676), in practice, testing and certification services sectors are open to foreign investment.

129. The testing and certification industry is a high-tech growth industry. The majority of the testing and certification services are provided by the private sector. There are currently about 570 private independent establishments engaged in testing and certification services (as their major economic activities in the HKSAR), employing over 12,000 people.60 The private sector contributed about HK$4-5 billion to GDP in 2008 (accounting for roughly 0.24-0.30% of GDP). About 60% of the revenues are generated outside the territory, mainly in the region of the Pearl River Delta. Receipts from testing services are primarily from testing textiles, garments, and footwear; toys and games; medical testing; and testing of electrical products.

130. In September 2009, the Government established the Hong Kong Council for Testing and Certification to spearhead the development of testing and certification services in HKSAR. The Government is supporting the work of the Council, as well as the Hong Kong Accreditation Service (HKAS), with grants of HK$20 million and HK$21 million, respectively, for the financial years 2010/11 and 2011/12.

131. In March 2010, the Hong Kong Council for Testing and Certification submitted a three-year development plan for the industry.61 The advantages of the HKSAR for third-party testing and certification are seen as: proximity to the Mainland and to tap into its growing market for such services; the high level of integrity and intellectual property protection; the good logistics support; port facilities and transportation; and the operation of the Hong Kong Accreditation Service (HKAS) as an independent and internationally recognized accreditation body. Challenges lie in, inter alia, the limited pool of assessors and services offered, as well as competition from global players in the conformity assessment business already operating in China (such as the Société Générale de Surveillance of Switzerland, or TÜV of Germany).

132. The Government expects that new regulatory requirements, such as the introduction of the registration for proprietary Chinese medicine, will create additional demand for various types of testing (e.g. testing for heavy metals and toxic elements, pesticide residues, microbial contaminations). Food testing is performed mainly by government laboratories, but the Government has started to outsource some of these services and plans to outsource up to 70% of routine food-testing work in financial year 2010/11. With the new requirements for nutritional labelling and claims introduced in July 2010, and with the new Food Bill (pending), business opportunities for testing services are likely to increase (Chapter III(2)(x)).62 In October 2009, the Telecommunications Authority accredited four local certification bodies to perform the full range of testing and certification services previously provided by OFTA.

133. For the first time since the entry into force of the CEPA, technical testing, analysis, and product testing services are the subject of liberalization measures (effective 1 January 2011 under CEPA Supplement VII). Testing organizations accredited by the HKAS will be allowed, on a pilot basis, to cooperate with designated Mainland organizations to undertake testing of selected products under China's Compulsory Certification (CCC) System. The tests are for products listed in the CCC

60 Hong Kong Council for Testing and Certification (2010). 61 Hong Kong Council for Testing and Certification (2010). 62 The Food and Drugs (Composition and Labelling) (Amendment: Requirements for Nutrition Labelling and Nutrition Claim) Regulation 2008 (the Amendment Regulation) enters into force on 1 July 2010. WT/TPR/S/241/Rev.1 Trade Policy Review Page 86

Catalogue, which are processed in facilities located in Hong Kong, China.63 The Mainland and Hong Kong, China have undertaken to promote cooperation between Hong Kong, China's testing laboratories and the Mainland's certification bodies, which are members of international multilateral systems on mutual recognition of testing and certification, so that Hong Kong, China's testing laboratories can be recognized under these multilateral systems. This provides an opportunity for Hong Kong, China laboratories to participate in multilateral mutual recognition arrangements, which are open only to national bodies from sovereign countries (e.g. the IEC System for Conformity Testing and Certification of Electrotechnical Equipment and Components).

(b) Cultural and creative industries

134. Hong Kong, China's creative industries include motion pictures, sound recording, television, design, architecture, animation and comics, advertising, publishing and printing, and digital entertainment. There are around 32,000 creative industry-related establishments in the territory, with over 176,000 practitioners, contributing around 4% of GDP (over HK$60 billion annually). Hong Kong, China's creative industries have preferential access to the Mainland under the CEPA.

135. Creative industries have been targeted for financial assistance by the HKSAR Government because of their expected benefits in terms of stimulating innovation, to help underpin long-term economic growth. Create Hong Kong (CreateHK) is a government agency established on 1 June 2009, inter alia, to better coordinate government policy and implement dedicated incentive schemes to support the development of the creative industries. In consultation with the creative industries, CreateHK has identified seven strategic areas for further development: (i) nurturing a pool of creative human capital that will form the backbone of the creative economy; (ii) facilitating start-ups and development of creative establishments; (iii) generating demand for innovation and creativity and expanding local market size for creative industries; (iv) promoting creative industries on the Mainland and overseas to help explore outside markets; (v) fostering a creative atmosphere within the Hong Kong, China community; (vi) developing creative clusters in the territory to generate synergy and facilitate exchanges; and (vii) promoting Hong Kong, China as Asia's creative capital.

136. The CreateSmart Initiative (CSI) was launched in June 2009 to provide financial support to initiatives for the development and promotion of creative industries that are not covered by existing funding schemes (i.e. Film Development Fund, Film Guarantee Fund, and DesignSmart Initiative). The CSI is funded with HK$300 million. The fund supports, amongst other things, marketing and trade promotion activities, research, training, and international creative competitions. The Film Development Fund (FDF) was first established in 1999 to support projects for the long-term development of the local film industry (Table III.8). An injection of HK$300 million was made in 2007 and its scope was expanded to finance the production of small-to-medium budget films. The Film Guarantee Fund (FGF) was established in 2003 to help local film production companies to obtain loans from lending institutions for producing films, and to stimulate the development of a film financing infrastructure in Hong Kong, China. The DesignSmart Initiative (DSI) was launched in 2004 with funding of HK$250 million to support design and innovation, and to promote the wider use of design and innovation in industries to help them move up the value chain. In 2007, funding of HK$100 million was committed to support the operation of the Hong Kong Design Centre (HKDC) over five years, to promote the importance of design and innovation.

63 Trade and Industry Department online information. Viewed at: http://www.tid.gov.hk/english/cepa/ legaltext/files/summary2010_note.doc. Hong Kong, China WT/TPR/S/241/Rev.1 Page 87

(c) Medical services

137. The selection of medical services for promotion by the Government appears to be linked to the need for healthcare reform in Hong Kong, China to meet the challenges arising from an ageing population and rising medical costs.64 Public healthcare in Hong Kong, China is an integral part of public services and is heavily subsidized. The HKSAR Government has earmarked HK$50 billion for reform measures, including possible subsidies for the public to join a supplementary healthcare financing scheme on a voluntary basis.

138. Hong Kong, China's private healthcare sector is small, accounting for about 12% of the total hospital beds in the territory. The supporting role of the HKSAR Government for the development of private-sector medical services lies primarily in ensuring that the professional standards are improved. It is also making available land for the development of private hospitals.65 According to the authorities, there are no barriers to foreign investment in medical services, except for (non-discriminatory) licensing requirements. The regulatory regime for the healthcare profession was described in the previous TPR of Hong Kong, China and remains unchanged.66

139. With the promotion of a private-sector healthcare industry, the HKSAR Government is also trying to emulate the economic success of other Asian countries, which have tapped into a growing international market of medical tourism. Opportunities arise in particular because of facilitated tourist entry from the Mainland.

(d) Environmental services

140. Hong Kong, China's environmental infrastructure has been developed largely with imported technology and services. The local environmental industry is small. In 2008, the private sector component of environmental industries contributed around 0.2% of the GDP. About 400 enterprises, mainly SMEs, are involved in waste recycling with low value-added. In addition, about 160 environmental consultancy firms established in Hong Kong, China provide services for local and Mainland projects.67

141. The Government's rationale for promoting environmental services is mainly twofold: to respond to increasing public concerns over pollution in the PRD region, and demands for greater environmental protection; and to capitalize on business and investment opportunities that arise from China's shift towards more stringent environmental legislation and greater public-sector spending on environmental projects. The CEPA provides the basis for closer environmental cooperation through preferential access to China and, in particular, Guangdong Province (CEPA Supplements IV and V). The long-standing environmental collaboration between the HKSAR Government and the Guangdong Provincial Government led to the launch of a five-year Cleaner Production Partnership Programme in April 2008, for which the HKSAR Government allocated HK$93 million to encourage the adoption of cleaner production technologies and practices.

(e) Education services

142. Educational services have been identified as one of the industries for development and promotion by the HKSAR Government. The Government's objective is to enhance Hong Kong,

64 Chief Executive (2009). 65 The HKSAR Government has reserved four areas of land for the development of private hospitals. 66 WTO (2007). 67 In 2008, the private-sector component of environmental industries contributed around 0.2% of the GDP (Home Affairs Bureau, 2009). WT/TPR/S/241/Rev.1 Trade Policy Review Page 88

China's status as a regional education hub and nurture talents to enhance its long-term competitiveness.68 It recognizes that investments in human capital are indispensable for a modern knowledge-based economy, and are necessary to address Hong Kong, China's shortage of skilled labour. The measures taken by the HKSAR Government have been focused mainly on promoting private-sector educational institutions, and increased entry quotas for non-local students, in conjunction with relaxed conditions for non-local graduates to seek employment in the HKSAR.

143. The HKSAR Government considers that the self-financing higher education sector has room for further expansion. Current total capacity (at degree level) is about 9,000 students, compared with 56,000 in public sector institutions. Measures to facilitate the development of self-financing post-secondary institutions (non-profit-making) include providing land at nominal premiums and interest-free loans. The Government has allocated four vacant school premises and four greenfield sites for international school development since 2007. It expects that the private sector will provide an additional 5,800 school places on a progressive basis starting from the 2009/10 school year.

144. Since 2008, the Government has relaxed the immigration control so that non-local graduates might take up employment in Hong Kong, China after graduation. The "skills" and "availability" requirement was relaxed, and non-local students may stay in HKSAR without limitation for 12 months after graduation.

145. Foreign investors may offer courses and set up branches of foreign academic institutions in Hong Kong, China under the Non-local Higher and Professional Education (Regulation) Ordinance (Cap. 493). Since the beginning of implementation of the Ordinance in 1997, about 1,200 courses have been registered under the Ordinance.

68 Chief Executive (2009). Hong Kong, China WT/TPR/S/241/Rev.1 Page 89

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